Policy makers will rely on local demand to fuel growth
rather than export revenue and investment, while regulators may
encourage more companies to raise dividends to bolster interest
in the stock market, said Richard Gao, a money manager at the
San Francisco-based company that oversaw $19.2 billion globally
at the end of October, according to its website.

“The government has made it very clear that going forward
China’s growth will come more from domestic consumption,” Gao,
whose China Fund beat 80 percent of its peers over the past five
years, while trailing most of them in 2012, said in a phone
interview yesterday. Matthews is overweight consumer-related
companies and is avoiding cyclical stocks, he said.

Premier Wen Jiabao signaled a shift away from exports and
capital spending and toward consumption in March, saying China
needs to move to a more sustainable economic model. Wen and
President Hu Jintao are forecast to hand over power to a new
generation of leaders at the 18th Communist Party congress due
to start today.

The new leadership will assume stewardship of an economy
that grew at the slowest pace in more than three years last
quarter. China’s Shanghai Composite Index has dropped 5.8
percent this year, compared with a 11.4 percent advance in MSCI
Inc.’s emerging-markets index.

‘Quite Attractive’

Valuations on the Shanghai Composite have fallen to 9.8
times estimated profit, compared with an average multiple of
17.8 since Bloomberg began compiling weekly data on the gauge in
2006. The MSCI China Index of mostly Hong Kong-traded stocks is
valued at 10.2 times profit after gaining 14 percent in 2012.

“The overall valuations of Chinese companies are still
quite attractive,” Gao said. While declining to name which
stocks he is buying, Gao said he favors companies such as
supermarket operators, department stores, technology firms and
gaming stocks.

BlackRock Inc., the largest money manager in the world,
recommends buying China stocks for long term investment on
“attractive” valuations. Investment opportunities which could
follow structural reforms are “enormous,” Jing Ning, a
BlackRock portfolio manager, wrote in an e-mailed note today.

Mobius Fund

Matthews’ China fund, which has lost 3.2 percent in the
past five years and returned 5.3 percent in 2012, invests mainly
in Chinese companies listed in Hong Kong and the U.S. as well as
foreign-currency denominated shares traded in the mainland. The
top two holdings as of the end of June were Hong Kong-listed
Digital China Holdings Ltd., a distributor of technology
products, and Ping An Insurance (Group) Co., data compiled by
Bloomberg show. Ping An, China’s second-biggest insurer, gained
20 percent this year, while Digital China advanced 16 percent.

A gauge of consumer-staples companies in the MSCI China
Index jumped 704 percent in the 10 years to yesterday, the top
performer on 10 industry groups, while a measure of consumer
discretionary companies climbed 138 percent.

Mark Mobius, executive chairman of Templeton Emerging
Markets, will co-manage a China fund starting this month that
will favor consumer stocks such as liquor producers.

Dividends of developing-nation equities will be supported
by improvement in the Chinese and U.S. economies next year,
Vandenbulck said.

Dividend Yield

The dividend yield on the Shanghai Composite is 2.76
percent, the second-lowest among the so-called BRIC nations,
data compiled by Bloomberg show. The dividend payout among
China’s publicly traded companies, or the cash dividend as a
percentage of companies’ annual net incomes, rose 1 percentage
point to 31 percent, in 2011 from the previous year, the
regulator said in a May 10 statement.

“There is a trend in China that more and more companies
are willing to pay dividends,” Matthews’ Gao said. “Companies
able to pay dividends on a sustainable basis will benefit
shareholders a lot and show solid fundamentals. These are what
the Chinese companies should be encouraged to do.”